3D Insight - AACO · 3D Insight - Issue 163D Insight - Issue 15 Page 6 Boeing and Airbus forecasts...

3D Insight - Issue 16 ISSUE 16June 2013

3D Insight A Publication by AACO and Seabury Aviation & Aerospace

3D Insight - Issue 16

0 Confidential – not for third party distribution © Seabury Group 2010

Seat capacity breakdown from MENA excluding AACO carriers

Seats (K)

Source: Innovata (June 2012), Seabury analysis.

3D Insight - Issue 16 Page 2

Part Three of a Four part series

The Major Airlines Outside of MENA

This is the third article in a multi-part series on the AACO carriers’ major non-AACO competitors. This article examines the competition from North & South East Asian carriers (excluding China and Indian subcontinent), with a particular focus on the six largest carriers in the region: Cathay Pacific, Singapore Airlines (SIA), Korean Air, Thai Airways, Japan Airlines (JAL) and All Nippon Airways (ANA) (Figure 1).While these carriers offer limited connectivity to the

MENA region, they are key competitors to AACO carriers on indirect services from Europe to Asia and Europe to Australasia. The top 6 have been chosen and form the focus of this article given that they together account for 50% of seats offered between Asia and MENA, with the remaining 50% being fragmented between a wide variety of much smaller carriers. Overall the top 6 are the most mature and developed of Asian carriers and likely to have the most influence on AACO carriers.

Background

Fig 1 - Seat capacity breakdown from MENA excluding AACO carriers

3D Insight - Issue 16 3D Insight - Issue 16 Page 3

The size and diversity within the Asia-Pacific region makes dealing with this expansive area in one article difficult. Socio-economic, political and geographical environments are not homogenous and neither are the trends in the development of air transport. The focus in this article has been South-East and North East Asia with India and China warranting more specific attention in subsequent articles. The scope includes all South-East Asian countries within ASEAN (Indonesia, Thailand, Malaysia, Singapore, Philippines, Vietnam, Burma, Brunei, Cambodia, Laos) as well as Hong Kong, Macau and Taiwan and the North Asian countries of South Korean Japan, and Mongolia (Figure 2). North and South-East Asia have demonstrated impressive growth when compared to more mature markets in Europe or North America. IATA recently commented that following Middle-Eastern carriers with the strongest demand (capacity) growth in 2012 of 10%, were Asian-Pacific carriers with growth of 4.7% . This is in comparison with more

modest growth of 2.2% in Europe and 0.6% in North America. It should, however, be noted that while for the purpose of this analysis North and South-East Asia have been grouped, their respective growth rates are likely to vary. North Asia exhibits rates more in-line with those of developed regions whereas South-East Asia is largely responsible for the high overall Asia-Pacific growth rates, with economic characteristics of a developing region. Nevertheless, the legacy carriers in focus are not immune to internal and external pressures, faced by the overall industry. Externalities have typically come in the form of tsunamis and earthquakes as well as less usual health pandemics including bird flu and SARS, while internal threats are not dissimilar to those faced by all carriers in other parts of the world. Pressure from low-cost carriers in the region and from Middle Eastern carriers on intercontinental markets have squeezed margins and driven the need for more flexible and adaptive business models.

Introduction

North & South East Asia’s Big 6

Fig 2 - Focus of this article: North & South East Asia excl. China and Indian subcontinent


Focus of this article: North & South East Asia excl. China and Indian subcontinent

North-East Asia

South Asia

Australasia

China

Indian sub-continent

1


Although overall the region has shown strong growth, there is disparity on which carriers are supplying these additional seats. The share held by LCCs increased from 4% to 17%, at the expense of the top six carriers who showed a decline by 17% points over the same period (Figure 4). Legacy carriers also showed a slight decline from 2008 to 2010, driven by the global economic

crisis, to which these carriers were more exposed considering their dominant long-haul operations and exposure to freight markets. Marked capacity cuts by JAL and ANA over this period are reflective of the airline’s extensive restructuring to overcome bankruptcy and an example of the strain faced by legacy carriers over this time.

Despite the strong growth in demand driven by emerging Asian markets, the need to effectively grow matching capacity, without oversupplying the market, remains. In sum, the total number of seats offered has shown continuous growth since 2004 with an average annual growth rate

of 5% (Figure 3). This compares with the same view of European and North-American capacity development which clearly shows cuts from 2008-2009 as a result of the worldwide recession, to which Asian carriers appeared to be relatively immune.

Capacity Development

Fig 3 - North & South-East Asia excl. China capacity development (All carriers)


a – North & South East Asia capacity development

All carriers Seats departed per annum , million

Note: Top 6 includes ANA (including All Nippon Airways, Air Nippon, Air Nippon Network & Air Japan), JAL (includes Japan Airlines, J-Air, JAL Express, Japan Transocean Air), Singapore (includes Singapore Airlines, Silkair & Scoot), Thai (includes Thai Airways & Nok Air), Korean (Korean Air & Jin Air), and Cathay Pacific (includes Cathay Pacific & Dragonair). Source: Innovata (2012), Seabury analysis.

0

100

200

300

400

500

600

700+5%p.a.

2012

37%

2007 2006 2005 2004

54%

26% 4%

10% 5%

2009 2008 2011

4% 8%

30%

3%

17%

2010

N & S Asia - Top 6 N & S Asia - Other N & S Asia - LCC Other European AACO

Overview

Fig 4 - North & South-East Asia excl. China capacity development (Top 6 carriers)


b – North & South East Asia capacity development

Top 6 carriers Seats departed per annum , million

Note: Top 6 includes parent and subsidiary airlines. Source: Innovata (2012), Seabury analysis.

0

50

100

150

200

250

300

2006 2005 2004

29%

28%

13% 11% 11% 9%

+0.3%p.a.

2012

21%

27%

14%

12%

15%

11%

2011 2010 2009 2008 2007

JAL

Korean

Cathay Thai

Singapore

ANA



LCC orders (next 10 years)

Number of aircraft on order, 2013-2023

Note: *15 public orders, 100+ expected announcement; includes only firm orders. Source: ASCEND, Seabury analysis.

386

483

57

175

237

7371

20 25

103

32

Cebu

23

116

43

312 305

190

115*

478

303

8 8

17 8

75 20 10 12

100

43

575

92

Air Asia

592

206

Firm orders In service

Japan

Stand-alone LCCs Subsidiaries of top 6 European LCCs

3D Insight - Issue 15 Page 5

Intra-region capacity development


Within North & South East Asia capacity development

Seats departed per annum , million

0

100

200

300

400

500

600+5.5%p.a.

N & S Asia - Top 6

N & S Asia - Other

N & S Asia - LCC

2012

41%

37%

22%

2011 2010 2009 2008 2007 2006 2005 2004

63%

31%

5%

CAGR %

+26%

+8%

0%

Note: Top 6 includes parent and subsidiary airlines. Source: Innovata (2012), Seabury analysis.

Growth of LCCs in the region has been striking, significantly eroding legacy carrier capacity share. This is championed by dominant South-East Asian LCCs including AirAsia, Lion Air, Cebu Pacific and Tiger Airways their growth is more extreme. Also noticeable, is the more steady growth of the LCC subsidiaries launched by the top six carriers, which will be discussed in further detail later on. Together, AirAsia and Lion Air have shown an

unprecedented level of confidence in the future growth in the region with a combined order of in excess of 800 aircraft for delivery over the next 10 years , as illustrated in Figure 6. This order is indicative of these carriers’ strategies to grow quickly, but over a variety of regions by setting up multiple base and franchise-style operations across the region. This strategy will be examined in more detail further on.

The threat that LCCs in Asia pose to traditional legacy carriers becomes clearer with a focus on

intra-region capacity development (Figure 5), where these carriers are strongest.

Fig 5 - Within North & South East Asia capacity development

Fig 6 - Asia-Pacific passenger and freight deliveries 2012-2031

2


Boeing and Airbus forecasts also show aggressive single-aisle deliveries in the region of around 300 per year, assuming linear deliveries from now until

2031 (Figure 7). Over the next 10 years, this puts the AirAsia and Lion Air order at around 30% of Asian-Pacific single-aisle orders.


International arrivals (‘000), 2009-2011 growth (%)

2009-11 tourism to ASEAN 2011 international arrivals to ASEAN from the world

Source: ASEAN.org

ASEAN 46%

EU-25 9%

China 9%

Japan 5%

Australia 5%

USA 5%

South Korea 3%

India 3%

Hong Kong 2%

Taiwan (ROC)

2%

Rest of the world 11%

52% 53% 54% Rest of the world

2010

74

47%

+10% +12%

2011

81

46%

2009

66

48% ASEAN

As is the case in other regions, the development of LCCs in the region is intrinsically linked to deregulation and the resulting ability to offer more point-to-point services. In South East Asia this proposition is attractive to the large volumes of tourist traffic which enter the

region via a major hub but which subsequently benefit from “hopping” between countries where there is no other alternative transport, usually over fragmented topographies or bodies of water as well as a strong inter-region traffic (Figure 8).

Fig 7 - Asia-Pacific passenger and freight deliveries 2012-2031


Asia-Pacific passenger and freight deliveries by 2012 - 2031

Number of unit deliveries for 2012-2031

Sources: Airbus and Boeing Global Market Forecasts.

763

3,078

6,028

370120

2,410

6,060

Twin-aisle Very large aircraft Regional Jets Single-aisle

Airbus Boeing

Fig 8 - 2009-2011 tourism to ASEAN

The need for these cheap, direct air services drives the growth in non-stop connections offered by the likes of AirAsia and Lion Air. These two are close to surpassing

the number of non-stop connected pairs in the region offered by the top six legacy carriers (Figure 9).


A more granular view on LCC penetration in the top six carriers’ home countries again emphasises the impact of LCCs in the region but also the contrast between their impact in North and South East Asia. Overall, LCC growth in North Asia (Japan and Korea) is far more conservative, owing largely to different

regulatory, socio-economic and geographical characteristics including slower deregulation, a stronger focus on premium traffic and overall longer stage lengths which are less suited to typical LCC operations. In 2012, LCCs had a penetration of 9.5% within North East Asia and 52% in South East Asia (Figure 10).

Fig 9 - Top 6 vs. LCC non-stop connection


Top 6 vs. LCC non-stop connections

# of city pairs flown by A320 or B737 aircraft families

020406080

100120140160180200220240

2004 2005 2006 2007 2008 2009 2010 2011 2012

Lion & AirAsia ALL LCCs Top 6

CAGR %

+33%

+1%

+28%

Note: Based on annual capacity on flights with at least 365 frequencies per year. Source: Innovata, Seabury analysis.

Fig 10 - LCC home market penetration of Top 6 carriers


LCC home market penetration of Top 6 carriers

% of seat capacity offered by LCC

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012

9% 7%

1%

35%

62%

Source: Innovata, Seabury analysis

South Korea Thailand Singapore

Japan Hong Kong

There is no doubt that a need exists for Asian legacy carriers to address the LCC threat on their doorstep. With carriers such as Cathay Pacific having recently boosted focus on intra-regional short-haul markets to avoid exposure to both increasing competition and economic slow-down affecting its premium long-

haul markets, the need to address the threat of local competition has never been more important. While JAL and Korean Air have limited exposure to LCCs, the likes of Singapore Airlines and Thai Airways have developed strategies to combat this threat.

3

4


Singapore Airlines has typically managed to maintain healthy margins by focussing on strict cost controls on non-customer facing parts of the business while continuing to invest in a strong product offering which boosts yields. Recently, however, the consistent delivery of profits has come under threat. In response the carrier cut capacity and restructured its network to combat falling passenger figures. The launch of its own long-haul LCC, Scoot, is a more direct approach to shift focus from premium markets and address the LCC threat in the region. Launched in June 2012 and now operating a fleet of five 777-200ERs, its first year of operations has seen Scoot launch services to Australia, Japan, China, South Korea, Taiwan and Thailand with load factors around 80% in its first seven months of operations . Nevertheless, the carrier will start to prove its worth only in 2015 when it is expected to start making a positive contribution to the SIA group. This is in addition to Singapore

Airlines’s Tiger Airways which was founded already in 2004. Currently Tiger and Scoot operate relatively independently; however, this is likely to change with Tiger’s move from its LCC terminal to Scoot’s Terminal 2 at Changi Airport. This is with the view that closer partnership and connections between the carriers will develop. Mirroring this LCC start-up approach is Thai Airways through its own LCC hybrid start-up, Thai Smile (Table 1). The carrier operates 17 daily flights on eight routes with a fleet of five A320s. Although initially intended as a counter-measure against LCC competition, the carrier has ultimately evolved into more of a regional hybrid model. Although according to Thai Airways, Thai Smile is a regional rather than low-cost carrier, it has a “low cost base achieved through aspects of LCC model such as single aircraft type, new fleet, etc” . Such a cost structure is crucial if Thai is going to remain a competitive force within the region.

Table 1 - North and South-East Asian legacy carriers’ LCC subsidiaries


North & South East Asia legacy carriers’ LCC subsidiaries

Legacy carrier LCC subsidiary

Japan

None

5

6


The threats that the top six carriers face outside the region have already been touched on and centre predominantly on competition from Middle-Eastern carriers, an overall slump in demand on long-haul routes driven by the European economic crisis and an unsteady North-American economic recovery. With a focus on the top six carriers only, growth comes from routes to Turkey and Russia & CIS, both less mature markets than Europe or North America (Figure 11). Although starting from

a low-base, capacity of the top six carriers to Turkey rose by 18.6% year-on-year and 13.1% to Russia & CIS driven, predominantly by Singapore Airlines and Korean Air. Indian subcontinent and Australasia have also been traditionally well served still growing markets for the Top 6 carriers. These focused markets enable the carriers to divert long-haul growth away from more traditional, and stagnating, European and North American markets.

Ex-Region capacity development

Fig 11 - Top 6 ex-Region capacity development


Seat capacity growth from North & South Asia to RoW Top 6

North & South East Asia

Australasia +3.2%

North America +0.5%

Africa -0.1%

Indian Subcontinent

+5.8%

Russia & CIS 13.1%

ECAA 0.7%

Turkey 18.6%

AACO Arabian Gulf -0.3%

2012 Top 6 seat capacity from North & South Asia. Seat growth CAGR 2007 – 2012 (%)

Note: South and Latin America excluded from analysis as they account for <1% of seat capacity from North & South Asia Source: Innovata, Seabury analysis

North Africa & Levant -0.5%

Key: 2012 Capacity to/from focus region 2007-2012 CAGR

So far, Asian legacy carriers have been more successful in founding LCC subsidiaries to address the LCC threat than their counterparts in more developed regions. Europe and North America are littered with short-lived LCCs started up by legacy carriers; in North America this includes Song (Delta), Ted (United), Metrojet (US Airways), Tango (Air Canada) and in Europe, Buzz (KLM) and Go (British Airways). In addition to the two Asian examples discussed above, there are numerous other examples of legacy LCC subsidiaries as illustrated below. Notably, Cathay Pacific, although

having a regional division in Dragonair, has no distinct LCC subsidiary. Instead, since 2012, the carrier seems to be integrating its response to the LCC threat within its mainline sales strategy by offering “Fanfares” which are tickets for sale at prices comparable to LCCs. Although still accounting for less than 1% of seats, these fares have seen an 80% take-up as at April 2013 . The strategy involves a limited number of tickets going on sale once a week for travel from immediately to two months in advance with the aim to clear distressed inventory.

7


A comparison of a similar picture, but excluding the top six and focusing on all other carriers, gives insights into which growing markets are being underserved by the top six Asian carriers. The most obvious examples are North and South-East Asia to Africa and North Africa & Levant which show capacity reduction for the top six and 11.7% and 8.7% growth respectively for all other carriers. The same can be said for North and South-East Asia to the Arabian Gulf, in which the top six Asian carriers have seen a 0.3% decline in capacity vs. a 13.4% capacity increase driven by other carriers (Figure 12). This is mostly a direct result of competition from Middle Eastern carriers who are better positioned, at least geographically, to serve these markets. Located on the axis between Europe and

Africa and Asia and Africa, the Middle-East’s big three (Emirates, Etihad and Qatar) capitalise on growing Asia-Africa and Europe-Africa demand. Connecting traffic at Dubai, Doha and Abu Dhabi is more than half of the volume and is growing at 10% a year. Qatar Airways and Etihad Airways in particular have been able to mobilise narrow-body fleets on thinner African routes to great effect, something which the top six Asian carriers in focus would find difficult to serve given the combination of market size and longer stage length to reach Africa. Current and almost exclusively wide-body fleets may make serving long, thin markets difficult; orders of new generation of aircraft such as 787 provide a potential alternative.

Fig 12 - Other carriers ex-Region capacity development


Seat capacity growth from North & South Asia to RoW Others

2012 seat capacity (excl. Top 6) from North & South Asia. Seat growth CAGR 2007 – 2012 (%)

North & South East Asia

Australasia +5.7%

North America +1.7%

Africa 11.7%

Indian Subcontinent

10.0%

Russia & CIS 12.9% ECAA

1.4%

Turkey 5.7%

AACO Arabian Gulf 13.4%

Note: South and Latin America excluded from analysis as they account for <1% of seat capacity from North & South Asia Source: Innovata, Seabury analysis

North Africa & Levant 8.4%

Key: 2012 Capacity to/from focus region 2007-2012 CAGR

As alluded to above, the role that carriers in MENA play on the top six’s capacity development ex-North and South-East Asia should be emphasised. It is evident that capacity to MENA is heavily dominated by the big three which each have aggressive growth strategies on routes both Westbound (expansion into Africa and Europe) and Eastbound (expansion into North and South-East Asia and the Indian sub-continent) driving a 13% per annum growth of capacity from 2004 to 2012 on North/South-East Asia to MENA (Figure 13). As already discussed,

these carriers are exploiting their location to capture Asia-Europe and Asia-Africa connecting demand. The level of connecting traffic captured by the large gulf carriers will be difficult for Asian carriers to match by virtue of their less-central location. Nevertheless, South-East Asian carriers benefit from having the rapid growth of the region in their home markets, whereas the gulf carriers can only address this demand from their hubs, through offering connecting services.

Focus on MENA


Fig 13 - Capacity from North & South-East Asia to Arabian Gulf


Capacity from North & South East Asia to the Arabian Gulf, North Africa & Levant

Seats departed per annum (M)

9.0

2.9

1.5

0.8

0

2

4

6

8

10

12 +13% p.a.

AACO

Others

2008 2007 2006 2005 2004

0.6

0.8 N & S Asia - Top 6

2012 2011 2010 2009

Note: Top 6 includes parent and subsidiary airlines Source: Innovata, Seabury analysis

CAGR %

+4%

+1%

-1%

Expansion by MENA carriers into South-East Asia has come both in the form of capacity growth in traditionally strong markets as well as more innovative and forward-looking growth into new markets. An example of the former is Emirates’ consolidation of its position on its Dubai-Hong Kong and Dubai-Bangkok routes. According to CAPA, in 2012, 1.19 million passengers flew with the carrier from Bangkok to Dubai, 80.9% of which were connecting beyond Dubai, with the strongest of those markets being Paris, Manchester, Hamburg, Dusseldorf, London, Frankfurt and Nice.

As seen in Figure 14 below, Emirates has a 35% share of the capacity from the Middle East to Hong Kong. In addition to its capacity advantage, Emirates has a frequency advantage compared to Cathay Pacific offering 35 weekly return services compared to Cathay Pacific’s 21 weekly return flights. Balanced well between capacity and frequency, Emirates is well suited to capture both the point-to-point and connecting traffic between Asia and Europe and Africa through its hub in Dubai.

Fig 14 - Capacity share from the Middle East to Bangkok and Hong-Kong


0

5

10

15

20

25

30

35

8

2

14

0

6

10

4

12

0

5

10

15

20

25

30

35

12

10

4

0

8

2

6

14

Arabian Gulf – Bangkok capacity share

June 2013 – Arabian Gulf to Hong Kong Weekly seats (‘000) Seat share (%)

Sources: Innovata, Seabury analysis.

June 2013 – Arabian Gulf to Bangkok

Weekly seats (‘000) Seat share (%)


Qatar Airways, rather than consolidating presence on traditional routes, has begun what appears to be a strategy of serving second and third tier cities in the region. The most recent such development is the launching of flights between Doha and Clark airport located 80km north of Manila and largely

dominated by LCC carriers only. Phnom Penh, Cambodia and Yangon, Myanmar, are two further examples of the airline’s entry into emerging markets which it believes hold significant untapped demand.

The discussion above highlights the threat posed to Asian carriers by mega-hubs emerging in the Middle-East, not least by virtue of their location between Asia and Europe and Africa. This location gives an advantage to gulf carriers to offer connections onwards to far-reaching regions from Asia with two relatively equal sectors. In contrast, the asymmetrical location of Asian carriers makes a similar strategy difficult without ultra-long sectors. The East coast of Americas or even regions in Africa and Europe are challenging to serve from the far corners of East Asia. For Asian carriers, therefore, the building of partnerships and alliances both within the region and those beyond is integral. On intercontinental services partnerships with carriers on other continents give Asian carriers

the opportunity to establish pseudo-hubs where traffic can be fed and distributed to destinations which cannot be easily served by their own metal. Within Asia, alliances provide legacy carriers with a competitive advantage over LCCs by gaining feed from carriers outside the region. Overall, in the Asia-Pacific region there are over 22 airlines in a global alliance or in the process of joining (Figure 15 and 16). This includes membership of the three global alliances but also more bilateral partnerships as well as closer equity investment arrangements, as discussed earlier in the context of LCC subsidiaries. Asian carriers, particularly JAL and ANA, have built strong networks of anti-trust immunities allowing for joint pricing and capacity planning across regions, as illustrated below.

Alliance development

Fig 15 - Asian carriers in alliances Fig 16 - Networks of anti-trust immunity


Alliance membership / candidacy in Asia-Pacific

* *

*

* In joining process (not yet official member)

Source: Company and government websites, Centre for Asia and Pacific Aviation, US Secretary of Transportation.

15Confidential – not for third party distribution © Seabury Group 2010

JAL and ANA significantly benefits from anti-trust immunities which allow for joint price and capacity planning

The current network of anti-trust immunities



JAL and ANA significantly benefits from anti-trust immunities which allow for joint price and capacity planning

The current network of anti-trust immunities



Typically Asian carriers have relied on strong yields driven largely by a superior product and reliance on significant premium traffic. This is more so the case for North Asian carriers such as Korean Air, Cathay Pacific and ANA who are less exposed to competition on lower yielding South-East Asian long-haul markets and local LCC competition, (particularly Korean Air and ANA). Although the top six have been able to grow yields by around 1% a year from 2007 (and 4% for Korean Air), their vulnerability to external shocks, and in particular

economic crises, is evident. In the coming years, the top six may see increasing yield erosion as LCCs emerge and develop – AirAsia has already developed in Malaysia and spread to Thailand and Japan, whilst Jetstar has begun to develop subsidiaries in Japan, Hong Kong, Vietnam and Singapore. As discussed, legacy carriers have attempted to compete against this with investments in LCC operations themselves, to guard premium revenues and divert lower yielding traffic to operations with a matching lower cost base.

Revenue improvement

Korean Air’s strong yields can be explained by its location which means it faces less direct competition from high-capacity-lower-yield Middle-Eastern carriers on routes from South-East Asia to Europe. More locally, the South Korean LCC breakthrough is still fairly limited and poses a minimal threat compared to faster growing and more established South-East Asian LCCs as

shown in Figure 6. Travel in the region is also less dominated by tourism and more by higher yielding business traffic. At the lower end of the scale, Thai sits in a relatively low yield market – facing stiff competition on the Europe-Bangkok trunk routes, whilst Singapore faces high LCC competition both at home (Tiger and Jetstar) and from its nearest neighbour Malaysia (AirAsia).

Unit revenue development

Fig 17- Unit revenue performance


Unit revenue development for the Top 6 carriers

Total RASK (¢/ASK)

5

6

7

8

9

10

11

12

13

2007 2008 2009 2010 2011 2012

ANA

Korean

Cathay

Thai Singapore

Note: JAL excluded from financial analysis as it did not report results during is restructuring in 2009 and subsequent bankruptcy filing in 2010. Source: Company financial public data, Seabury analysis.

CAGR %

+4%

+1%

-1%

+1%

+1%


All carriers in focus showed a noticeable drop in yields in 2009, a direct result of the global economic slow-down (Figure 17). The extent to which these carriers rely on cargo is a fundamental factor in the interplay between their yields and the global economic climate. Freight markets are more sensitive and react early to economic downturns, very quickly impacting these airlines which account for around 40% of global FTKs . Cargo can typically account for up to 30% of some Asian carriers’ total revenues with the resulting impact from recent FTK declines (3% in 2012, 5% in 2011) having a

negative impact on profitability . In contrast, LCCs which carry less cargo and allocate capacity on less exposed intra-Asian markets, are far less affected by falling intercontinental cargo demand. With cargo being intrinsically linked to economic development and therefore GDP, Asian carriers should expect the levels of growth as highlighted in Table 2, although this has already been far outstripped by MENA’s top 3 carriers. Developing markets in Africa, MENA and within North and South-East Asia itself are likely to hold the strongest opportunity for growth of 5.7-6.8% per annum from 2013 to 2017.

Table 2- Expected GDP growth forecast vs. historical seat capacity growth


Expected GDP growth forecast vs. historical seat growth

Constant price GDP growth for 2013-2018 vs. seat growth for 2007-2012 from home to the world (one direction)

Regions 2013-2017 avg. GDP growth

MENA Top 3

Africa 6.6% -0.1% 4.2%

North & South East Asia 5.7% -1.2% 12.5%

Other Asia 4.2% 6.6% 14.7%

Australasia 3.2% 3.2% 10.0%

Europe 1.8% 0.7% 14.3%

MENA 6.7% -0.4% 13.1%

North America 3.2% 0.6% 23.9%

South America 4.5% n/a 110.3%

Note: MENA includes North Africa, Levant and Arabian Gulf; South America includes Caribbean, Latin and South America; Asia includes North East Asia, Indian Subcontinent and South-East Asia; straight average growth between 2012 and 2017; CAGR seat growth.Source: Innovata, Seabury analysis, IMF.

Prior to 2009, the picture of load factors for the top six focus airlines reflected a distinction between South and North Asian carriers. The former delivered high load factors at the expense of yields to cater for thicker and, more price-sensitive demand while the latter operated in thinner and more premium markets with lower load factors and higher yields. Nevertheless, recently Korean Air has bucked the trend increasing both load factors and yields to outstrip cost increases and

deliver significant margins, returning the carrier to profitability in the 3rd quarter of 2012 after boosting its international passenger traffic to record levels. In contrast, Cathay Pacific, Singapore Airlines and Thai, all with similar load factors in 2012 in the range of 75-80%, suffered from lower yields (Figure 18). Cathay Pacific maintained a cost position as high as that of Korean Air but without the associated strong revenue offset, leaving the carrier with its first half-year loss in 2012 since 2003 of $120M.

Load factor

8


Fig 18- Load factor development


Load factor

RPK / ASK (%)

50

55

60

65

70

75

80

85

2007 2008 2009 2010 2011 2012

ANA

Korean Cathay

Thai Singapore

Note: JAL excluded from financial analysis as it did not report results during is restructuring in 2009 and subsequent bankruptcy filing in 2010. Source: Company financial information, Seabury analysis.

Asian carriers have developed their brands over the years focusing on the quality of the service provided. Three of the top six carriers discussed in this article are ranked as 5-star airlines according

to the Skytrax ranking , and 3 of the 4 other 5-star airlines are from the same region (Asiana Airlines, Hainan Airlines and Malaysia Airlines), leaving only Qatar Airways outside of the region (Figure 19).

Product

Fig 19- 5-star carriers


The World’s 5 star airlines

Source: Skytrax, June 2013.

Airlines typically place a focus on building a strong brand image in the Asian region. As such, they build a premium product in order to attract and retain traffic, particularly in the front cabins. Singapore Airlines is seen as one of the strongest brands in the world, and has been for years. The airline’s token “Singapore Girl” is famous the world over and symbolic of the carrier’s focus on Asian hospitality and personable service. Singapore’s First class is directly comparable with that of Emirates or Etihad. Furthermore, regular cabin

modifications keep this product fresh and in line with the top end of the market. Singapore carries out regular cabin modifications, whilst Cathay is coming to the end of an interiors modification program. Another factor driving the high quality product is the intra-Asia traffic. Recent years have been good to the region in terms of economic growth, and this has stimulated high premium volumes through the region, despite a slump on routes outside the region.

9


A good example of this is Cathay Pacific , the carrier is investing in regional products that align them well with its regionalisation strategy, discussed previously. The airline has unveiled its New Regional Business Class with 47-inch seat pitch and 21-inch seat width. The degree of emphasis on a premium regional product as seen in Asia is unmatched in other regions in the world, where the focus has generally been on providing a skeleton product to cut costs in response to LCC competition. This is with the exception of the Middle-East, where gulf carriers have also continued to offer a strong product even on short flights within the region, often on wide-body aircraft. This further emphasizes the lingering premium demand intra-regionally in Asia and the resulting focus on an improved product.Whilst the above discussion has focused on Singapore Airlines and Cathay Pacific, the

premium products of the other carriers should not be underestimated. It is no surprise that ANA has recently been promoted to a 5 star SKYTRAX carrier, given that Japanese airlines have traditionally placed a strong emphasis on hospitality and product offering. In conjunction with this, differentiation from LCCs has been required to justify more robust yield development by clearly separating overall product from no-frills services. This drives another phenomenon in Asia: Multi-branding. As discussed earlier, in the context of LCC competition, the LCC spin-offs developed by Asia’s carriers are part of a strategy to separate premium from lower-yield demand. Branding and perception is a strong concept in Asia – more so than in many other areas in the world. It is for this reason that second brands have remained and been just as successful, without cannibalizing too much traffic from the mainline airline.

The top six Asian carriers show a low CASK overall with an unsurprising historic trend and a clear distinction between North and South-East Asian costs. South-East Asian costs have been driven

by relatively low labour costs as well as a high exposure to fuel and fleet costs whereas North Asian carriers incur higher labour costs, a result of operating out of more mature markets.

Cost management

Fig 20- Unit cost development


2008-2012 Top 6 unit cost and unit cost excl. fuel development

Unit Cost Trend ¢/ASK

Unit Cost Trend excluding Fuel ¢/ASK

Note: For JAL, 2009 and 2010 were the times of irregular reorganization proceedings, these financial values cannot be compared. Source: Annual reports.

4

6

8

10

12

14

2007 2008 2009 2010 2011 20124

6

8

10

12

14

2008 2009 2010 2011 2012

JAL ANA Cathay Thai Singapore Korean


2008-2012 Top 6 unit cost and unit cost excl. fuel development

Unit Cost Trend ¢/ASK

Unit Cost Trend excluding Fuel ¢/ASK

Note: For JAL, 2009 and 2010 were the times of irregular reorganization proceedings, these financial values cannot be compared. Source: Annual reports.

4

6

8

10

12

14

2007 2008 2009 2010 2011 20124

6

8

10

12

14

2008 2009 2010 2011 2012

JAL ANA Cathay Thai Singapore Korean


The Asia Pacific region has suffered from 2 recent major crises. The first one in 1997-1998, caused by devaluation of most currencies in the ASEAN region, affected airlines across the region, several saved from the brink of bankruptcy. Carriers such as Singapore Airlines and Cathay Pacific already showed a strong resilience due to a rigorous yield management and overall excellent management. They have also been shielded by government support and a very captive home market. Nevertheless, some lessons have been learned from this crisis and actions such as the first steps in regional liberalization have been pushed forward. The second crisis from 2008-2009 is illustrated in the CASK development chart above. South-East Asian carriers have recorded 8-9% CASK growth against the previous year mostly due to exponential fuel price increase. Significant capacity cuts in 2009, however, have enabled them to recover most of the losses. A major consequence of the crisis was the drop in premium passenger demand, on which all legacy carriers within the region, and more specifically the top six, heavily rely. Most of the ASEAN airlines started restructuring plans following the 2008-2009 crisis (Thai Airways in 2009, Garuda in 2010 and Malaysia in 2011). In all cases, turnarounds included significant capacity cuts and a cost base restructuring via workforce reduction and fleet efficiency improvements. Cathay Pacific and Singapore Airlines also started

cost saving programmes. Restructuring measures included hiring freezes, voluntary leave campaigns, old fleet retirement and capacity cuts. Singapore Airlines also announced an organisational restructuring to more closely align the company’s commercial, operational and corporate planning activities . Most of these programmes were, however, accompanied by large investments in fleet renewals or launch of new subsidiaries. The financial crisis has impacted Japanese and South Korean carriers as strongly as their Southern competitors. Japanese carriers were more affected due to their higher cost base mainly driven by labour costs. Despite large capacity cuts since 2009, JAL filed for bankruptcy in 2010, after being de-listed from the Japanese stock exchange and having accumulated a debt of more than $23 billion (¥2.3 trillion) . The restructuring plan included severe capacity cuts, retiring more than 100 aircraft to be replaced by smaller and more efficient aircraft , reducing its workforce by a third and through an organisational restructuring as well as selling off stakes in non-core businesses such as several ground handling and travel subsidiaries . JAL has shown positive net income for 2011 and 2012 fiscal years despite the 2011 earthquake, the global economic recession and higher fuels costs combined with a weak yen exchange rate . Similarly all top 6 carriers show a profit margin for 2012 (Figure 21).

Financial crises & restructuring

Fig 21- Top 6 2012 profit margin


Cathay 1.8%

2.2%

7.0%

Korean

Singapore

15.8% JAL

Thai

ANA

1.5%

3.3%

Top 6 2012 Operating Profit Margin

Source: Annual reports.

However, low cost carrier entry in the Japanese market as mentioned above, as well as labour and

systemic fuel cost increase will continue to put pressure on new group financial performance.


Cathay 1.8%

2.2%

7.0%

Korean

Singapore

15.8% JAL

Thai

ANA

1.5%

3.3%

Top 6 2012 Operating Profit Margin

Source: Annual reports.

10

11

12

12,13

14,15


A key challenge for the region is fuel costs, which account for 30-40% of the top six carriers’ costs. “The increase in the price of fuel since 2010 has had a big impact on the operating cost of our routes. On a 747-400 flight to London, fuel today represents 62.5% of the total cost of the flight. In 2010, when fuel was substantially lower, it represented only 47.9%. Taken over a year, on that one flight pair alone, the fuel bill will have increased by $14

million – again, on just this one flight pair,” Cathay Pacific chief executive John Slosar explained in the November 2012 issue of the CX World company magazine . Although one solution is fuel hedging, this has also had a negative impact on most of the carriers during the crisis of 2008-2009 when oil barrel prices plunged. In general, airlines are still cautious in their use of fuel hedging, even though this is a tool to mitigate effects of fuel volatility.

Fuel

Another aspect is the currency exchange levels. JAL and ANA are very dependent on the yen exchange rate fluctuations. Bank of Japan announced the launch of “a new phase of monetary easing” on April 4. The central bank’s statement spurred more yen selling and dollar buying, dragging down the value of the Japanese currency to near 100 yen to the dollar. Although both ANA and JAL do hedge many of their transactions, in comparison to 80-85 yen rate in 2012 fiscal year, the airlines are feeling

the pressure of new exchange rate in their fuel bill.While there are also fears that weaker yen will discourage Japanese passenger travelling abroad, it is expected to boost tourism into Japan as well as improve international business travel trends since business travellers from export dependent industries of Japan are likely to make more overseas trips as their businesses pick up due to weakened yen .

Currency

The top six carriers have traditionally focused on long-haul and ultra-long-haul operations with large wide-body fleets. This has driven a high aircraft utilisation, which is close to that seen by Middle-East carriers, viewed as best-in-class in terms of aircraft utilisation. It is to be noted that, to answer high density demand, JAL and ANA have used their aircraft on domestic routes which has driven the utilisation down but mitigated capacity constraints at main airports. Historically, Japanese airlines were some of the most prominent operators of aircraft such as the 747-400D, a domestic variant of the 747-400. In recent times, however, following restructuring efforts, the relaxation of capacity constraints at Tokyo’s airports (Narita and Haneda) and fuel costs increases, these types of operations have reduced.

The size of the regional or low-cost subsidiaries of the Top 6, and indeed their growth trajectory are much more modest than the stand-alone LCC’s in the region. This is illustrated clearly in Figure 6. While AirAsia has been able to reach a competitive utilisation close Middle-East airline standards, it still remains a few daily hours below European and North American benchmarks. Most of the other regional carriers have an utilisation close to 6-7h per day. The average stage length between the main destinations is higher than most point to point routes within Europe or North America limiting the number of rotations that an aircraft can complete in a day (Figure 22). This comparison includes all top six regional and LCC subsidiaries.

Fleet

16

17


Fig 22- 2012 average aircraft utilisation


2012 average aircraft utilisation

Narrow-body Avg. daily hours

Wide-body Avg. daily hours

9

8

7665

10

8

11

9

0

2

4

6

8

10

12

14

Top 6 LCC MENA

1211

1110

77

131312

0

2

4

6

8

10

12

14MENA Top 6

Note: JAL includes Japan airlines Domestic, TransOcean, Ltd, and Jetstar Japan; Cathay includes Dragonair; Singapore includes SilkAir, Scoot and Tiger Airways; Thai includes Nok Air and Smile; Korean includes Jin Air. Source: Ascend, Seabury analysis

The narrowbody fleets of Singapore Airlines, Cathay Pacific and Korean Airways’ subsidiaries are in line with their LCC competitors. Thai, ANA

and JAL’s LCCs still operate fleets of old 737 classic and A320s, but they have fewer than 90 aircraft between the three of them.

Fig 23- 2012 aircraft average age by region


2012 aircraft average age

Narrow-body Avg. age (as at Dec 12)

Wide-body Avg. age (as at Dec 12)

17

1111

665

8

4

65

0

2

4

6

8

10

12

14

16

18

14

12111110

6 65

4

0

2

4

6

8

10

12

14

16

18

Top 6 LCC MENA

Top 6 MENA



2012 aircraft average age

Narrow-body Avg. age (as at Dec 12)

Wide-body Avg. age (as at Dec 12)

17

1111

665

8

4

65

0

2

4

6

8

10

12

14

16

18

14

12111110

6 65

4

0

2

4

6

8

10

12

14

16

18

Top 6 LCC MENA

Top 6 MENA


The average age of the fleet of widebodies in the region is an average of 11 year vs. 5 for the top three Middle-Eastern carriers (Figure 23). A number of Asian carriers still operate old 747s delivered in the 1980-90s, and Korean and Thai have been recent

operators of the A300. Nevertheless, this has to be viewed in perspective with the order log book, including more than 700 widebodies including 777, A350 and A380s for Singapore, Korean and Thai Airways.


Each of the top six carriers has individually placed significant orders. As at June 2013, Singapore Airlines already announces an order book comprising 5 A380-800s, 13 A330-300s, 8 777-300ERs and 40 A350-900s. Its SilkAir unit has an order for 54 737s and is awaiting delivery of one A320. Scoot, the long-haul budget subsidiary, has an additional 20 787-900s on order . In the same scale, Cathay Pacific has on order 6 747s, 37 777s, 13 A330s, 76 A350-900s and -1000s (Figure 24). Even though these significant orders will enable the

top six carriers to partially replace their old aircraft, these will still put them at risk in comparison with the log book from the top three Middle-Eastern carriers. Different to most LCCs, Jetstar Asia and AirAsia X also have wide body aircraft, and some of these aircraft are deployed on markets within the region. Scoot, the low cost medium / long haul subsidiary of Singapore Airlines, commenced operations in June 2012 and has a Boeing 777 only fleet.

Together, Lion Air and AirAsia both have more than 800 narrowbodies on order. This new capacity will flood the market with current incumbents having much more modest orders so far as shown above. The market may not be able to digest all this new capacity, although this extra – potentially over –

capacity will facilitate retirement of old fleets, it may also become an issue during crisis periods. The explosion of capacity in the Asia-Pacific region, as compared to other parts of the world is illustrated below in the order book values for all carriers over the next 20 years (Figure 25).

Fig 24- Number of aircraft on order to 2023


2013-2023 aircraft order

Wide-body Forecast deliveries (2013-2013)

198164

1269493

44

478

352

195

0

50

100

150

200

250

300

350

400

450

500MENA Top 6

Note: do not include subsidiaries. Source: Ascend, Seabury analysis

18


Fig 25- Aircraft on order (Next 20 years)


Map of the world – detailed

9869

975

1239 5839 6203

1963

2110

Aircraft on order (next 20 years) Number of aircraft

Note: Includes narrowbodies and widebodies Source: Airbus Global Market Forecast

ASEAN carriers see value in creating a deregulated sky between all their members. Two agreements have already been ratified by most of the members. The first one is the Multilateral Agreement on Air Services (MAAS) signed in 2009 by all members except for Indonesia and Philippines which frees up 3rd to 5th freedoms between ASEAN capital cities. Access to secondary cities has been addressed in 2010 in the Multilateral Agreement for the Full Liberalization of Passenger Air Services (MAFLPAS), signed by all members except for Indonesia, Brunei, Laos and Cambodia. In 2011 during the 13th ASEAN summit, ASEAN endorsed the initiative of establishing a Single Aviation Market by 2015 in order to support ASEAN’s economic development. The Implementation Framework that has been agreed by member countries also consists of a Roadmap that provides detailed measures to achieve ASAM.Even though ambitious, the goal is not to reach an open sky such as what has been built in Europe. The scope only includes third to fifth freedoms, leaving aside 7th freedom which is part of the European single sky. As professor Alan Khee-Jin Tan wrote in CAPA’s Airline Leader journal, Issue 16, ASEAN carriers still have “many miles to go”. Each country has decided to participate in deregulation at their speed. Professor Alan Khee-Jin Tan highlights that Indonesia, which represents almost half of the ASEAN population, has so far remained out of the agreement, protecting its home carriers such as Garuda from low

cost competition in the region. The other aspect of deregulation that needs to be addressed is in terms of control and ownership rights, which limits regional expansion. Carriers such as AirAsia or Jetstar grow primarily by creating a subsidiary in each country they want to serve. Initiatives are in place or being discussed to define a regional concept of ownership, but there are still steps to reach before a complete liberalization can be realised.While ASEAN countries are looking into establishing relationships with other countries in the region, the lack of unified markets in their own region disadvantages their own airlines in the long run. For instance, ASEAN has signed an ASEAN-China Air Transport agreement with China, which is, however, only in force among China, Singapore, Malaysia, Thailand, Myanmar and Vietnam. The agreement provides unlimited third and fourth freedom capacity into points in China, with the exception of Hong Kong, Macao and Taiwan. Since seventh freedom capacity rights are not yet granted among ASEAN countries, ASEAN carriers are not able to take advantage of flying into China from other points in ASEAN. ASEAN countries are required to reach a common view and agreement before opening their market to North-Asian competitors such as Japan, South Korea or China entirely. However, over-capacity of airports in certain ASEAN countries and regional airspace congestion seem to hinder implementation of open skies policies.

Regulatory environment


Japan has given importance to developing its air transport market and signed open skies agreements to boost the growth of airlines in the country. In October 2010, an open skies agreement has been signed with the US; which grants 5th freedom traffic rights to both countries. Japan and the US are now considering opening 7th freedom rights in order to ease restrictions on cargo traffic. An open skies agreement with Australia has been signed in 2011, which provides 5th freedom traffic to Australian carriers. Japan and China signed an agreement in 2012, which allows passengers to fly between Japan’s Chubu and Kansai airports and China’s Guangzhou, Dalian and Chengdu airports. A new agreement between Japan and South

Korea is under way, which will expand the open skies agreement signed by the two countries in 2007.South Korea is also in plans to sign open skies agreements to increase its air transport connectivity. As per an agreement signed in 2009, South Korea and Canada have granted 5th, 6th and 7th freedom traffic rights to each other. In order to expand into South America, South Korea has entered into an open skies agreement with Paraguay, according to which South Korean airlines are allowed to fly unlimited times to Paraguay and 5th freedom traffic are also granted reciprocally, although any indication of such services to be launched has yet to emerge.

Despite some of the most impressive growth shown in the industry, Asian legacy carriers are not immune to the typical influences which airlines across the globe face. Stiff competition from Middle-Eastern carriers on long-haul routes between South and South-East Asia and Africa/Europe and LCC carriers in the region, combined with strong exposure to premium traffic and freight downturns have squeezed margins and put these carriers under significant pressure. Nevertheless, Asian carriers have the security of having one of the fastest growing air transport regions as their home markets. Asian carriers have shown innovation and adaptability through launching LCC and regional subsidiaries to more effectively compete with competitors in the region. The success, so far, of these subsidiaries has been impressive when compared to similar strategies in more mature markets and illustrates the different market dynamics at play in the region. Overall, legacy carriers have been able to maintain the premium branding that has, for years, distinguished their

mainline operations from competitors. This trend is continuing, but facing increasing challenges as Middle-Eastern carriers make premium service an ever more important priority.Another dimension is the development of large carriers in China as well as local LCCs driven by de-regulation in that country. This will further change the competitive landscape and will be a focus of the subsequent article with an exclusive look at Chinese carriers.The future of air transport in the region will be dominated by massive orders which show levels of short haul growth that no carrier in the region has ever attempted. Even with the strong growth in demand driven by emerging Asian markets, the need to grow capacity, while avoiding oversupplying the market, will remain a challenge for all carriers. The outcome from unprecedented order books of LCCs such as Lion Air and Air Asia has yet to play out with the explosion of capacity likely to further shift the goal posts, once again forcing legacy carriers to re-address the fundamentals of what makes their businesses profitable.

Closing thoughts

1 Source: Business enquirer, Global air traffic grows 3.2 percent in April - IATA, AFP, http://business.inquirer.net/124669/global-air-traffic-grows-3-2-percent-in-april-iata2 Source: Acend worldwide

4 Source: Kaminski-Morrow David, Lion Air unveils order for over 230 Airbus jets, Flightglobal, http://www.flightglobal.com/news/articles/lion-air-unveils-order-for-over-230-airbus-jets-383551/

5 Source: CAPA, Singapore Airlines interline boosts scoots prospects but growth profits are still two years away, http://centreforaviation.com/analysis/singapore-airlines-interline-boosts-scoots-prospects-but-growth--profits-are-still-two-years-away-94374

6

7 Source: CAPA, Cathay Pacific promotes cheap fanfares as quasi answer to LCCs but structural change is needed, Flightglobal, http://centreforaviation.com/analysis/cathay-pacific-promotes-cheap-fanfares-as-quasi-answer-to-lccs-but-structural-change-is-needed-106584

8 Source: CAPA, Asian carriers post solid traffic, load factor increases in 2012 but cargo remains a headache, Flightglobal, http://centreforaviation.com/analysis/asian-carriers-post-solid-traffic--load-factor-increases-in-2012-but-cargo-remains-a-headache-aapa-96761

9 Source: Skytrax, 5 star airlines, June 2013, http://www.airlinequality.com/StarRanking/5star.htm10 Source: Singapore airlines, Press release 5-Jan 2011, http://www.singaporeair.com/jsp/cms/en_UK/press_release_news/ne110105.jsp11 Source: Masters Coco, Japan Airlines Files for Bankruptcy, Time, 19 January 2010, http://www.time.com/time/business/article/0,8599,1954656,00.html12 Source: Govinda Samy Siva, Japan airlines gets court approval for restructuring plan, Fligthglobal, 1 December 2010,

http://www.flightglobal.com/news/articles/japan-airlines-gets-court-approval-for-restructuring-plan-350353/ 13 Source: Yeo Ghim-Lay. JAL begins restructured life, Airline Business, 18 April 2011, http://www.flightglobal.com/news/articles/jal-begins-restructured-life-355680/14 Source: Japan Airlines, Press release April 2013, http://press.jal.co.jp/en/release/201304/002493.html

16 Source: Tsang Daniel, CATHAY PACIFIC TO BE A SMARTER & LEANER AIRLINE IN 2013, Aspire aviation, 3 January 2013, http://www.aspireaviation.com/2013/01/03/cathay-pacific-2013-outlook/

15 Source: Wall Street Journal, Court Approves Japan Airlines Restructuring, 1 December 2010, http://online.wsj.com/article/SB10001424052748704679204575646170703984324.html

17 Source: Inai Soichi, ANA, JAL Face Head Winds As Abenomics Takes Off, Nikkei, 10 April 2013, http://e.nikkei.com/e/fr/tnks/Nni20130410D10HH874.htm18 Source: Park Kyunghee, Singapore Air Buys Planes to Take on Discount Carriers, Bloomberg, 3 June 2013,

http://www.bloomberg.com/news/2013-06-02/singapore-air-buys-planes-to-take-on-discount-carriers.htmlNOTE: All sources viewed and downloaded in Q2 2013

Source: CAPA, Thai Smile turns attention to international market including three routes to India, Flightglobal, http://centreforaviation.com/analysis/thai-smile-turns-attention-to-international-market-including-three-routes-to-india-100314

3 Information: Population age, gender, travel behavior, disposable income and economic development


StatisticsExecutive Summary Statistics (Q4 2012)

Source: AACONote: Includes scheduled operations for EK, EY, GF, KU, ME, MS, QR, RJ, SV, TU, WY, XY

AACO members passenger size and growth

Fig 1 - Year-on-year revenue passenger kilometers (RPKs) growth versus passenger load factor (PLF). Bubble size indicates carrier size measured as available seat kilometers ( ASKs)Source: AACO


Executive Summary StatisticsSource: AACONote: Includes scheduled operations for EK, EY, GF, KU, ME, MS, QR, RJ, SV, TU, WY, XY

Total Q4 Year-on-Year Change International Q4 Year-on-

Year Change Domestic Q4 Year-on-Year Change

No. of Pax 29,835,517 11.6% 25,555,093 11.3% 4,280,424 13.9%

Tonnes Cgo 1,147,591 19.3% 1,133,377 19.6% 14,213 -3.5%

RPKs (000) 102,716,976 13.0% 98,636,759 12.2% 4,080,218 37.4%

ASKs (000) 136,960,155 12.1% 131,547,918 11.4% 5,412,237 34.5%

Pax Load Factor 75.00% 0.6 pp 74.98% 0.6 pp 75.4% 1.6 pp

RTKs (000) 13,579,368 13.8% 13,281,637 13.9% 297,732 10.1%

ATKs (000) 22,214,376 10.5% 21,704,905 10.7% 509,471 3.0%

Weight Load Factor 61.13% 1.8 pp 61.19% 1.7 pp 58.44% 3.7 pp


-30

-20

-10

0

10

20

30

40

74666462 7860 8068 76

ME

EK

GF

TU

1 billion ASKs

KU

WY

RJ

QRSV

PLF (%)

XY

MS

EY

AACO members passenger size and growthFig 1 - Year-on-year revenue passenger kilometers (RPKs) growth versus passenger load factor (PLF). Bubble size indicates carrier size measured as available seat kilometers (ASKs)Source: AACO

RPK Growth Q4’12 (% YOY)


AACO members cargo size and growth

Fig 2 - Year-on-year revenue tonne kilometers (RTKs) growth versus weight load factor (WLF). Bubble size indicates carrier size measured as available tonnes kilometers (ATKs)Source: AACO

Arab passenger growth

Fig 3 - Historical trend of Q4 passenger numbers at most Arab airportsSource: AACO, ACI

Arab cargo growth

Fig 4 - Historical trend of Q4 cargo transported at most Arab airportsSource: AACO, ACI


Arab passenger growthFig 3 - Historical trend of fourth quarter passenger transit volume in most Arab airportsSource: AACO, ACI

Pax (million)

20

40

30

60

10

50

0

70

Q4 - 2012

52.2

Q4 - 2011

Pas

seng

ers

55.560.9

Q4 - 2010Q4 - 2009

55.0

+9.7%


Arab cargo growthFig 4 - Historical trend of fourth quarter cargo transported in most Arab airportsSource: AACO, ACI

Tonnes (thousand)1,500

1,000

500

0Q4-2012

1,472

Q4-2011

1,435

Q4-2010

1,457

Q4-2009

1,379

Car

go

+2.6%


AACO members cargo size and growthFig 2 - Year-on-year revenue tonne kilometers (RTKs) growth versus weight load factor (WLF). Bubble size indicates carrier size measured as available tonnes kilometers (ATKs)Source AACO

-20

0

20

40

45 50 55 60 65 70 75

WLF (%)

QR

MS RJ

KU

ME

TU

SV

GF

EKEY

500 million ATKs

WY

RTK Growth Q4’12 (% YOY)


Arab departure growth

Fig 5 - Historical trend of Q4 quarter aircraft traffic volume in most Arab airportsSource: AACO, ACI

Intra-regional Arab market

Fig 6 – Q4 international Arab market passenger numbers within the Arab WorldSource: AACO, IATA

Inter-regional Arab market

Fig 7 - Q4 Arab market passenger numbers to/from the Arab worldSource: AACO, IATA


Arab departure growthFig 5 - Historical trend of fourth quarter traffic volume in most Arab airportsSource: AACO, ACI

Departures (thousand)

200

100

300

0Q4-2011

+2.5%

Q4-2012

531518

Q4-2010

579

Q4-2008

565

Dep

artu

res

400

600

500


Intra-regional Arab marketFig 6 – Fourth quarter international Arab market passenger numbers within the Arab WorldSource: AACO, IATA

Pax (thousand)

WithinNorth Africa

WithinNear East

3,500

Near East- North Africa

North Africa - ArabianPeninsula

Near East - Arabian Peninsula

0

+176%+47%+4%+7%

3,000

2,500

2,000

1,500

1,000

500

WithinArabian

Peninsula

+15%-6% Q4-2010

Q4-2012Q4-2011


Intra-regional Arab marketFig 7 - Fourth quarter Arab market passenger numbers to/from the Arab worldSource: AACO, IATA

Pax (thousand)

12,000

10,000

8,000

6,000

4,000

2,000

0

+7%+11%

+8%

+4%

+3%

With the AmericasWith Sub-Saharan Africa

With AustralasiaWith Mid AsiaWith Europe

Q4-2011Q4-2012

Q4-2010


Airport passenger volume

Fig 8 – 2012 Q4 passenger volume in most Arab airports by portSource: AACO, ACI

Airport cargo volume

Fig 9 – 2012 Q4 cargo volume in most Arab airports by portSource: AACO, ACI


Airport passenger volumeFig 8 – 2012 fourth quarter passenger volume in most Arab airports by portSource: AACO, ACI

15,000 16,0006,0005,0004,0003,0002,0001,0000

Pax (thousand)

DXB

FJR

RBA

AMM

RKT

AGA

BEY

ALY

ALG

ASW

MIR

CMN

LXR

SHJ

BAHCAI

RAKTUN

HRG

AUH

DOHJED

SSH

DMM

MCT

KWI

RUH


Airport cargo volumeFig 9 – 2012 fourth quarter cargo volume in most Arab airports by portSource: AACO, ACI

40 120 64016080 6002000

Tonnes (thousand)

AGA

ALG

DMMBEY

RBA

LXR

TUN

MIR

CMN

RKT

FJR

KWISHJ

RAK

JED

MCT

RUH

DOH

BAH

DXB

CAIAUH

AMM


Domestic and international

Fig 10 - Q4 AACO members’ domestic/regional and international passenger volumehistorical trendNote: Includes scheduled operations for EK, EY, GF, KU, ME, MS, QR, RJ, SV, TU, WYSource: AACO

Fleet growth

Fig 11 - AACO members combined fleet growth by aircraft typeSource: AACO, Flightglobal

Fleet changes this quarter

Fig 12 – Q4 changes to the AACO fleet by carrierSource: AACO, Flightglobal


Domestic and internationalFig 10 – Fourth quarter AACO members’ domestic/regional and international passenger volumehistorical trendNote: Includes scheduled operations for EK, EY, GF, KU, ME, MS, QR, RJ, SV, TU, WYSource: AACO

Pax (million)30

25

20

15

10

5

0Q4 2010

24.4

21.0

3.5

Q4 2009

21.6

18.4

3.2

Q4 2012

29.2

25.2

4.0

Q4 2011

26.2

22.6

3.6

Int’lPassengers

Dom.Passengers


Fleet growthFig 11 - AACO members combined fleet growth by aircraft typeSource: AACO, ASCEND

Aircraft

0

200

400

600

800

1,000

42%

8%4%

Wide Body

Narrow Body

RegionalFreighter

2012

967

44%

10%4%

2011

908

45%

41%

9%5%

2010

862

45%

41%

9%4%

2009

767

46%

42%

Avg Seats 214.8 213.2 215.0 218.0

Avg Age (Yr) 7.70 7.31 7.37 7.21


Fleet changes this quarter Fig 12 – Fourth quarter changes to the AACO fleet by carrier Source: AACO, Ascend

Aircraft

898

700

750

800

850

900

950

Total

EK QR LN

AT RB

Q3-2012

BJ

Parked/Retired

WY MS

-13

Additions

49

SV KU 8U

Q4-2012

931

EK 16 LN 5 QR 5 8U 3 EY 3 8U 3 G9 3 KU 2 MS 2 SV 2 RG 1 RJ 1 WY 1 GF 1 IA 1

AT 3 EK 2 G9 2 IA 2 TU 2 BJ 1 RB 1

* Some member airlines’ data is not included in this graph as they were not AACO members in Q3 2012


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